Overview: The US budget agreement passed a House
committee vote by 7-6 and the bill is scheduled to be voted on by the entire
House today before the Senate take it up with the idea of passing it Monday.
The procedural step plus the weakness of China and Japanese data and soft CPI
figures from Europe has lifted the greenback against all the major currencies. The
euro and Australian dollar have been sold to new lows, while the dollar holds
ever so slightly below JPY140. Despite a stronger-than-expected Q1 GDP (4.0% vs.
3.5%), the Turkish lira leads emerging market currencies lower. The weakness of
the euro and escalating hostilities in Kosovo is weighing on the central
European currencies. The Philippine peso and Mexican peso have edged higher and
stand out among the emerging market currencies today.
The weaker growth impulses send Asia Pacific stocks lows and snapped a three-day advance in MSCI regional index. Europe's Stoxx 600 is off for the third consecutive session and the sixth in the past seven. US equity futures are trading with a slightly heavier bias. European benchmark 10-year yields are off 8-9 bp with some soft inflation reports in hand. The 10-year US Treasury yield is around four basis points lower to 3.65%. It peaked at the end of last week near 3.86%. Gold posted a potential key reversal to the upside, recovering from almost $1930 to $1963.50. It is stalling today after nearing $1965.50, as it is pulled between falling rates and a stronger dollar. July WTI fell 4.4% yesterday to almost $69 a barrel. The selling pressure was not satiated, and it is trading below $68.50 now. OPEC is meeting in a few days and the sharp fall in prices may encourage a few to enact more voluntary cuts.
Asia Pacific
Japan's economy grew by a
stronger than expected 1.6% at an annualized pace in Q1 and the question is
whether the growth impulses carried over into Q2. Today's report for April retail sales and
industrial production figures give some evidence Q2 is off to a slower start. Retail
sales fell 1.2% month-over-month in April. Economists had expected a 0.5% rise.
It is the first decline in five months. Industrial production also disappointed.
It fell by 0.4%. The median forecast in Bloomberg's survey looked for a 1.4%
gain. After a sharp 5.3% drop in output in January, industrial production
bounced back 4.6% in February and another 1.1% in March. Chip fabrication
equipment and aircraft parts production slowed, while the auto sector output
improved.
China's May PMI disappointed
and underscores fears that the Covid recovery was short and shallow. At 48.8 (vs. 49.2 in April), the
manufacturing PMI was below the 50 boom/bust level for the second consecutive
month. It has spent the first quarter above it after being below it in Q4 22.
Economists in Bloomberg's survey had looked for a small bounce. The
non-manufacturing PMI slowed more than expected: 54.5 (from 56.4) and
expectations for 55.2. The composite eased to 52.9 from54.4. The Caixin
manufacturing PMI will be reported tomorrow. It stood at 49.5 in April and
peaked at 51.6 in March, the highest since last June.
Australia's newly minted
monthly CPI rose for the first this year in April. The year-over-year pace rose to 6.8% from
6.3% in March. The median in Bloomberg's survey was for 6.4%. This measure
peaked in December at 8.4%. The surprise has boosted the risk of another rate
hike. The central bank meets next week, and the odds of a hike risen to a
little more than 20%, the most this month. Still, a hike is nearly priced in
for the August 1 meeting.
The dollar's potential key
reversal yesterday against the yen saw follow-through selling today to almost
JPY139.30. However, it
has recovered smartly in the European morning back to almost JPY140. It has
stretched the intraday momentum indicators. US rates are also softer, which if
sustained may help cap the greenback. A close above JPY140.10-30 would lift the
greenback's tone. After stabilizing in the first two sessions of the week,
the Australian dollar has broken down to new lows near $0.6475. There are
options for about A$570 mln at $0.6450 that expire today, which is near the
lower Bollinger Band. Still, there appears to be little meaningful support
ahead of $0.6400. Disappointing Chinese data and the broad strength of
the dollar saw the Chinese yuan weaken to new six-month lows. The dollar
pushed above CNY7.11 after settling near CNY7.08 yesterday. The yuan has fallen
in 15 of the past 18 sessions. The PBOC set the dollar's reference rate today
slightly below expectations (CNY7.0821 vs. CNY7.0824). Yesterday's fix was at
CNY7.0818.
Europe
The focus is eurozone
inflation. The
aggregate preliminary estimate for May will be reported tomorrow. Spain's
national figure on Tuesday may have set the tone. The EU harmonized measure
fell by 0.2% in May. The median forecast in Bloomberg's survey was for a 0.2%
increase. The year-over year rate fell back to 2.9% after April's spike to 3.8%
(from 3.1% in March). Today, Germany and France reported their figures today. France's
harmonized measure unexpectedly fell by 0.1%. It is the first decline this year
after rising by an average of about 0.8% in the first four months of the year. The
year-over-year rate eased to 6.0%, the least since last May. Germany's EU
harmonized measure also rose by an average of around 0.8% in the first four
months of the year. The states' reports were soft, and suggests that the EU
harmonized national figure, which is due shortly, may undershoot expectations
for a 0.2% increase. There are downside risks the median forecast in
Bloomberg's survey for a 6.7% year-over-year rate (from 7.6% in April).
The euro recovered from the
yesterday's pushed below $1.0680 and close near $1.0735. However, selling pressure re-emerged in
Asia, sending it to $1.0660 where it is finding some bids in the European
morning. Some pressure on the euro may have come from option-related
selling: options for a billion euros at $1.0675 expires today. The large
net long position in the futures market was scaled back but remains historically
large. The lower Bollinger Band is found slightly below $1.0625 today. The
US-German two-year rate differential is near 173 bp, the most since the banking
stress emerged in March. The $1.0680-$1.0700 offers nearby resistance. Sterling
is trading heavily, off around a half-of-a-cent, but is within yesterday's
range. It saw a low yesterday near a little above $1.2325. Last week's low
was closer slightly below $1.2310. It too found a bid in the European morning. Initial
resistance is seen $1.2380-$1.2400.
America
In the US, employment moves
front and center. Starting
with today's April JOLTS report is expected to show a continued decline in job
openings. Tomorrow's ADP's May private sector jobs estimate is projected to
slow to 170k from almost 300k. It has been alternating between increases and
declines this year and has averaged 204.5k this year. In the first four months
of the last year, ADP estimated that private sector payrolls increased by
nearly 347.5k jobs. The comparable numbers from the BLS establishment survey are
225k average in Jan-Apr this year and 473k in the first four months of 2022.
The Beige Book will be
released later in the session as input into the June 13-14 FOMC meeting. The pendulum of market sentiment has swung
from pricing in steady policy as recently as May 11 to discounting slightly
more than a 60% chance. A quarter-point hike is fully discounted at the July
25-26 meeting. Today, two Fed governors speak (Bowman and Jefferson). Boston
Fed President Collins (non-voter) and Philadelphia Fed President Harker (vote)
speaks, as well. Note that the May CPI will be reported as the June FOMC
meeting gets under way. Given the base effect (CPI rose 0.9% in May 2022 and
1.2% in June), making some conservative assumptions, the year-over-year rate is
likely to fall to around 3.5% in by the end of H1 23. That said, the comparison
will be considerably more difficult in H2 23 as headline CPI rose at an
annualized rate of 2.8% in H2 22.
Canada reports March and Q1
GDP today. The Canadian
economy began the year on a strong note, with output rising by 0.6% in January.
It slowed to 0.1% in February. The median forecast in Bloomberg's survey calls
for a 0.1% contraction in March. For the quarter, the Canadian economy is seen
expanding by 2.5% at an annualized rate after stagnating in Q4. There has been
a dramatic swing in rate expectations in Canada. The market is pricing in
about a 30% chance of a hike next week, up from less than a 10% chance at the
end of April. A hike is fully discounted by the end of Q3. As recently as May
4, indicative pricing in the swaps market had greater than a 50% chance of a
cut. The year-end policy rate is seen near 4.75%, up from 4% on May 12.
Mexico's central bank
publishes its quarterly economic outlook today. It will likely reinforce expectations for
a prolonged period that the overnight target rate will remain at 11.25%. After
the Banxico meeting earlier this month, officials saw average inflation falling
to 4.7% in Q4 and 3,1% next year. The core rate is seen averaging 4.9% in Q4 23
and 3.1% in 2024. Today's forecasts are unlikely to deviate much from the
post-meeting indications. Given the relatively strong Q1 performance, this
year's growth forecast may be revised higher from the current 1.6% projection. This
implies that the output gap is closing faster than the central bank anticipated.
The US dollar closed
slightly above CAD1.3600 yesterday and reached CAD1.3650 today. Last week's high was about CAD1.3655 and
the high from the end of April was just shy of CAD1.3670. Initial support is
now seen near CAD1.3625 and a close below CAD1.3600 would suggest a near-term
top for the greenback. However, a close above the CAD1.3655 area could signal a
move toward CAD1.3700-30. The US dollar also recovered yesterday in North
America against the Mexican peso. Support near Monday's low (~MXN17.5350) held
and the dollar bounced to MXN19.6930. It rose a little more today to MXN17.7050
where offers emerged and sent it back to about MXN17.6355. A convincing move
above MXN17.71 could spark gains toward MXN17.80, but we favor a consolidative
session.
Reviewed by Marc Chandler
on
May 31, 2023
Rating:
